Big tobacco is living on a vape and a prayer

The next big thing for big tobacco has turned into a bit of a nightmare. Vaping took off as a potentially healthier alternative to smoking for adults looking to kick the habit. But then it caught on with a whole new generation, sparking a teen epidemic in the US and fears that they could graduate to smoking traditional cigarettes. Matters worsened with a spate of illnesses among some users of electronic cigarettes, raising questions about the safety of vaping for young and old.
In the UK, the fallout from declining sales of tobacco alternatives across the Atlantic has hit British American Tobacco Plc and Imperial Brands Plc hard. Now as new management teams at both companies try to figure out what’s the best strategy back to growth, their fortunes will be driven more by regulations in the US than their business closer to home.
But this doesn’t have to be bad news. Heightened scrutiny in the US can dispel concerns about safety, and eventually pave the way for companies to expand their vaping technology to devices that deliver vitamins and medicines.
As the world’s biggest vaping market, accounting for about 45% of global sales in 2019, it’s little wonder the US slowdown is hurting. BAT, maker of Dunhill and Lucky Strike cigarettes, recently said sales growth from its new generation products would be at the lower end of its forecast range of 30%-50%. A few months earlier, it had guided to the midpoint.
With the scrutiny of vaping, having a broad-based portfolio of tobacco alternatives is crucial. Here BAT is well placed, having invested $4 billion over the past five years.
Vaping probably has the most long-term potential. In the meantime, heat not burn options may come to prominence, especially as they haven’t been drawn into the controversy. They’re already popular in Japan, but with Philip Morris International Inc. now selling its IQOS device in the US too, BAT may need to spend more in this area.
There’s a growing consensus that the vaping-related illnesses and deaths involved vaping oils carrying the psychoactive ingredient in tetrahydrocannabinol. In 2020, new US regulations will require companies to submit applications by May to keep their e-cigarettes on the market. Big tobacco has the resources to go through this complicated and expensive process. Smaller producers may not. Over about the next 12 months, this regime could reduce some of the competitive pressures on big tobacco.
—Bloomberg